We still expect one more 25 basis point cut at the December meeting and three 25 basis point cuts in the first three meetings of 2025.
As expected, the ECB lowered its key rate by 25 basis points at 3.25%. The interest rate decision itself was not a surprise to the market, with swaps incorporating a 97% probability for this measure and the euro’s implied volatility being one of the lowest in in recent years during an ECB decision day.
As only five weeks had passed since the last meeting, there was little new data and the market was initially divided on whether the ECB would skip a rate cut and wait until the December meeting . However, given that the Fed’s 50 basis point interest rate cut in September advanced the synchronized cycle of interest rate cuts globally, the lackluster data pointed to economic growth weaker in the eurozone and inflation was below expectations, policymakers had greater confidence in further easing of monetary policy conditions.
The ECB believes the disinflation process is “on track”, with headline inflation having fallen to 1.7% year-on-year, and although some upside risks remain, the governing council appears to be paying more attention risks linked to growth. Although the ECB does not forecast a recession in the Eurozone, geopolitical risks have recently intensified and the potential impact of the US elections on global trade barriers is a thorn in the side of policymakers.
We still expect a further cut of 25 basis points at the December ECB meeting and three cuts of 25 basis points in the first three meetings of 2025 (in January, March and April). The deposit rate should therefore be at 2.25% in April and for the rest of 2025. We believe that the measures will be taken sooner, as the risks to growth tend to diminish and central bankers will strive to stay one step ahead.
While before today’s meeting swap market participants had factored in a further 25 basis point rate cut in December, they increased their bets to 36 basis points after the press conference . The euro had started the day weakening slightly against most major currencies, but the dull tone of the ECB press release continued to weigh on the single currency. Euro zone government bond curves dipped and stocks extended their advance for the day before paring their gains to 0.8%.
While we expect quarterly profits for European stocks to improve compared to the first half, we continue to favor the United States. Beyond the domestic outlook, the potential impact of the upcoming US elections is crucial for European growth, through trade protectionism, currency and interdependence with Chinese growth. Instead, UK stocks appear better protected from US election risks, underscoring our slight overweight in this sector. We continue to favor quality EUR-IG bonds with medium duration and maintain our bearish view on the euro.
